Generally, human beings seem to be happiest in a collaborative state. Indeed, sharing a burden or a responsibility with another trustworthy person can be hugely calming or reassuring. This can be very true of, for example, a business. Running your own company can be incredibly stressful, with responsibilities building and building and compounding on each other. With another person there, a partner, there are increased opportunities for clarity, for deliberation and, ultimately, relief. The relationship of being a partner is can be a huge inpact, but it’s no surprise that it comes with specific tax rules with their own plusses and minuses included. Officially recognized partnerships imbue the businesses they define with a very different dynamic, one which is more multifaceted and adaptable, but one which is also more personal, a status which can be both limiting and freeing depending on one’s specific situation. In the end, no matter what the dynamic of your partnership may or may not be, its existence does alter the way your business operates, and the way it is legally viewed.
PARTNERSHIP AND ITS REPERCUSSIONS
A partnership is defined a relationship between two or more individuals who agree to take on the full responsibility of owning a business together. The level of commitment of each partner must be comparable to that of their peers. They must offer up a financial and physical commitment, putting in work with the company, and they must have a real stake in its profits and losses. In other words, they’re not just taking up space but are instead taking an active role in the business they supposedly co-own.
A partnership can file taxes as an individual entity, reporting on matters such as company income and deductions. Of course, the partners must file certain taxes separately as well. The most major difference here is that partnerships do not pay income tax. Rather, income tax is divided between the partners on their individual tax returns.
A partner is dramatically different from any employee. Therefore, they should never be asked to fill out a W-2 form.
Sometimes partnerships can get a bit more complex, with some business owners choosing to band together as a corporation. Those who choose to do so will have to fill out special tax forms and pay certain unique fees as well. They will also have access to special deductions.
In the end, there’s no doubt that your specific partnership will have unique tax rules which will dramatically shape the financial obligations of each partner. Rather than trying to keep such a complex matter straight yourselves, why not call AFS Taxsavers? We’ll make sure that your taxes are filed with complete accuracy that neither partner will ever over or under-pay.